Published on October 8, 2009
September, 2009 Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail On September 22, 2009, Quantum Retail launched an assortment and range Market Alert planning merchandising module to expand its merchandising suite's (termed Aberdeen’s Market Alerts "Q") footprint in retail. This module is geared towards fulfilling a localized provide timely analysis of merchandising need that exists in the retail industry today due to the current market events drawing ensuing tough retail economy. Quantum's latest module comes at a time upon independent fact-based when there is a willingness among leading retailers to tailor or customize research to lend insight into their assortments to more closely match the needs and wants of their the topics that impact customers. This Market Alert will outline the potential opportunities and organizations pitfalls of Quantum's strategy at a time when product localization and store- centric assortments are gaining traction in the retail industry, yet the purse strings are not exactly loose when it comes to retail IT spending. This "While Quantum's current Market Alert also assesses this development from an end-user's perspective. modules have work out well for us in terms of timely Quantum Expands Product Portfolio in Midst of inventory allocation and replenishment. We have not Unprecedented Retail Pressures spent any time looking at Tailored assortments are imperative for all retailers during the upcoming Quantum's assortment and holiday season for increased unit-level gross margin and inventory turns. In range planning module yet, fact, data from Aberdeen's Precision Merchandising benchmark report signifies main reason is that we are that in the midst of an economic downturn, retailers agree that store or kicking off several big channel-centric merchandising goals and profitability of their inventory process / IT projects around investment are the two leading challenges or pressures associated with the business and have put merchandising, assortment planning, and replenishment (Figure 1). together a roadmap that we are now following. Towards Figure 1: Foremost Localized Merchandising Objectives the end of this we are moving into range and 70% assortment planning and will be looking at the current 56% 60% vendors (including 50% 48% Quantum)". 40% ~Spencer Maynard, Head of Inventory Management, New 30% Look (current user of 20% Quantum inventory allocation and replenishment application) 10% 0% Maximize Gross Margin Maximize Inventory Turns Source: Aberdeen Group, January, 2009 © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail Page 2 But right after these two pressures comes a brand new entrant: matching competitor levels of customer-centricity (29%). Our data indicates that three key critical business pressures are influencing retailers towards precision merchandising. With the pressure mounting and the need to continue to drive growth and profitability despite a down economy, today's leading retailers are digging deep and taking action in order to build more customer-centricity into their merchandising strategies, and open the lines of communication among all parties around precision merchandising. For example, our data indicates that as a response to the pressures and the Best-in-Class Criteria profitability objectives, 71% of Best-in-Class retailers are creating tailored The maturity class criteria and store-specific assortments by using tools such as multi-attribute and include Best-in-Class (top 20% multi-variate customer analysis to counter the inaccuracies in unit and of respondents); Industry category-level merchandise forecasts due to demand volatility and poorly- Average (Middle 50% of targeted affinity-based allocations. Among Best-in-Class retailers, the respondents), and Laggard breakdown reveals a high concentration in personalized items (apparel) and (Bottom 30% of respondents). big-ticket or multi-feature items (consumer electronics). Total respondents: 110 retailers. Aberdeen used three Quantum's merchandising optimization suite (includes demand-response based key performance indicators to forecasting, replenishment, allocation, and the latest assortment and range determine the maturity class in planning modules) seeks to address at least some, if not all of these the retail value chain area of objectives, pressures, and actions that retailers are taking in order to create merchandising: tailored merchandise planning and execution for their stores and other sales √ Comp store sales channels such as web and catalog. √ Markdown Reduction Background and Market Impact √ Margin Uplift Quantum has customers such as Kohl's department stores, Guitar Center, New Look, Marks & Spencer, and others. This vendor's merchandise suite has emerged as a viable option amongst merchandising suite offerings from other retail enterprise-level technology vendors such as Oracle, SAP Retail, and JDA, among others. Quantum differentiates its applications by using a demand-response based analytical and forecasting engine to enable tailored assortments, allocation, and replenishment at the product department, class, and sub-class levels. Most assortment planning solutions work on time- boxed plans (seasonal and non-seasonal planning by week, month or other periods. The data in Figure 2 shows historically merchandising and assortment demand decisions tend to depend on POS data collected in the past two years. However, Quantum has built the merchandising tools based on continuous demand activity. For example, as a forward looking fashion retailer you can view the continuous activity of a product in the stores. The application's key proposition for end-users is the time continuum. For example, the assortment and space planning as well as financial summary can be seen for future forecasts from June to October through the holiday season. Stores can stacked into different micro clusters, with visibility down to the store-level and ability to go beyond traditional pre and in-seasonal planning. The merchandising analysts and category managers do not need to depend on pre-season or in-season estimates. This application also offers © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail Page 3 the end-user the option to use "what if" scenarios to view the impact on financial and operational goals when new products enter the assortment. Figure 2: Using POS Data for Merchandising and Assortment Decisions 36% Use of historical POS data to 27% shape demand 8% Best-in-Class Average Laggard 0% 10% 20% 30% 40% Source: Aberdeen Group, January, 2009 This vendor offers the rich use of gross margin, revenue, and return on inventory investment-related Key Performance Indicators (KPIs) that eliminates the guesswork from merchandising planning and brings in a metric-based retailing approach. Every specific assortment from a store impacts all metrics including Gross Margin Return on Investment (GMROI), average sales per week, inventory turns, service level, average weekly margin, gross margin, current inventory units, average inventory units, target inventory units, and cost of goods sold, among other metrics or KPIs. Quantum also offers recommendations in case a retailer is faced with low GMROI and sales disparity in the assortment and range planning process. The application workflow is geared towards managing the need for automated store clustering based on the products that are really selling and the use of assortment rationalization logic- ranging of specific product groups, and size and pack optimization. Companies can also build in exceptions based on sales goal, margin, service levels, size criteria, price, and other merchandise objectives and non- financial goals. While Quantum's merchandise optimization suite offers all of the above, it does not yet offer micro space planning and visualization in the different store layouts, reporting of revenue per square foot, physical store layout, or planogramming systems. And, while Quantum has yet to release a markdown management module, it does plan to do so early in 2010. Will Retailers Buy Into Quantum's Value Proposition? The recently released assortment and range planning module, combined with Quantum's plan to release markdown optimization early next year, © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail Page 4 further firms up the company's end-to-end merchandising offering. Quantum product development initiatives is geared towards further penetrating the retail segment with an alternative offering to a market that has been dominated by disparate legacy, enterprise, and best-of-breed merchandising applications. Based on the margin and inventory turn pressures being faced by retailers today discussed earlier in this report, the timing of introducing precision assortment and demand-driven merchandise optimization could not be more opportune for a small best-of-breed vendor like Quantum to capture market share from the enterprise-level retail merchandising suite providers. Our merchandising-related data signifies that while 36% of retailers currently employ some type of precision merchandising program, another 26% indicate they are beginning implementation or are planning to implement a precision merchandising program. In order to achieve the tailored assortment goals that map into the margin and inventory objectives of the retailers, it is important that these companies broaden their vision and specifically, ask themselves, "How will the current economy affect my customers and sales?; How have customer expectations of the shopping experience changed?; What tools or methodologies are available to me to best address these conditions?" One of the dominant responses to emerge from this questioning is the willingness of many forward-thinking retailers to tailor or customize their assortments to more closely match the needs and wants of their customers. Our data shows that Best-in-Class retailers are 1.4-times as likely as all Laggard retailers to create assortments that are tailored to specific store needs. This is a marked departure from recent retail merchandising strategies that relied on historical sales forecasts. The most successful retail format was to expand the number of stores at a rapid rate, stocking each one with an identical assortment, in as nearly an identical floor layout as possible. The economy and consumer's low confidence has changed to obviate this once peerless format. Only time will tell whether Quantum challenges the larger and more established players in the space through its demand response based granular and flexible approach towards merchandising tools. In the meanwhile, it does possess three ingredients that can lead to success: a robust platform, a small but marquee list of retail customers, and a relentless plan to take market share from dejected retailers who are using legacy or home-grown merchandising systems that come short on expected precision merchandising, profitability, and customer goals. © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail Page 5 Case Study — Guitar Center Guitar Center, one of the largest specialty retailers in the US, is a 200+ store national chain that carries a wide variety of musical instruments. One of the biggest challenges facing Guitar Center was the need for tailored and localized merchandising, with carefully crafted inventory selection and management for each store. This strategy is necessary because the cost and turn of the merchandise varies greatly from store to store depending on customer purchase patterns and socio-economic data. For example, it carries very fast-moving, "beginner" electric guitar sets starting at $199. It also carries very slow-moving, highly expensive models such as a vintage Eric Clapton Stratocaster for upwards of $15,000. So Guitar Center looked for and found an application that provides a single, consistent view of inventory enterprise-wide and in real-time. According to Irene Messier, Sr. VP of Planning and Allocation, "Evidence of the success of the deployment includes: • The project was completed within the agreed-upon three-month time frame and on budget • $25M (or 11%) strategic reduction of inventory • $8M reduction of overstocks • $8M fill-in to understocks • 26% decrease in stock-outs • 20% fewer forecasting errors • 2% increase in sales Precision merchandising is not limited to brick and mortar stores; it is truly a cross-channel approach to get the right goods to the right people, regardless of where or how they want to buy. For example, the online sister company to Guitar Center is MusiciansFriend.com. Its Director of e-commerce, So Young Park, wanted to experiment with different content on landing pages in an effort to measure the overall effectiveness of one page against another. Using an A/B split test, visitors were randomly shown the two different pages and measured the results from each. The layout with a reinforced content messaging approach generated a 35% conversion lift over the original home page. Park says, "Reinforcement can be a tactic that we can use to drive conversion, particularly in places where you can display the offer." Guitar Center will also be deploying the assortment and range planning application system shortly. © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail Page 6 Recommendations for Action For retailers currently evaluating or planning to evaluate retail merchandising technology applications, below are recommendations for action that can assist your decisions: • Integrate customer and merchandise data with an advanced merchandising system. More than 60% of Industry Average and Laggard retailers have collected POS data and other sources of customer data for years, but have done very little with it. Industry Average and Laggard retailers have two or more years of POS data which they can retrieve and analyze. Many Industry Average retailers also hold focus groups and hand out CSAT surveys. All of these are fine; but only when weights are assigned and attributes rationalized, can their wants, needs and affinities be recognized as precision merchandising assortment inputs, and have a truly influential effect on both top line and bottom line profitability. Companies must also use short-term demand data that can build visibility towards continuous demand activity. • Execute the merchandising fundamentals. Any end-to-end merchandising program requires companies to understand the fundamentals of forecasting, assortment planning, open-to-buy, sourcing, allocation, replenishment, and other procurement-related retail supply chain functions. If you can't execute the fundamentals, don't even think about localized product merchandising or assortment planning for stores and channels. • Commitment towards localized merchandising formats. Precision and localized merchandise and assortment planning is relatively new in practice and methodology. A large retailer like Macy's, which recently committed to precision merchandising (dubbed as "My Macy's"), may find a smaller and more nimble retailer such as Belk going after key target segments, and perhaps eroding Macy's market share. There is no evidence to suggest this is happening, but Best-in-Class retailers reaping the rewards of precision merchandising cannot afford to be complacent or slow at implementation. Tailored assortments have to be deployed accurately and quickly at stores for best weekly or monthly margin, sell-through, and inventory turn results. These are difficult economic times, and retailers hungry for growth, or hungry for survival, will not willingly cede a profitable strategy without a fight. • Automate multi-channel data access for retail headquarters, warehouse, and suppliers’ job-roles for effective end-to-end merchandising. Aberdeen's 21st Century Retail Supply Chain: Three Key Imperatives for Retailers benchmark report denotes that 44% of Best-in-Class retailers provide multi- channel (stores, web, catalog, and other sales channels such as mobile) customer data access to certain retail headquarters and supply chain job-roles (an additional 40% indicate they do not have © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
Quantum Retail Launches Assortment and Range Planning: Potential for Tailored Assortments in Retail Page 7 the capability but plan to adopt within the next 12 months). Just as a business welcomes all revenue streams, so too should retailers embrace all multi-channel customer data streams. The end goal for merchandising and assortment optimization should be the availability of the desired product to the correct customer through the desired channel. This can potentially lead to a greater the sell-through, higher margins, and the happier customers. Related Research Inventory Optimization: Retail Strategies 21st Century Retail Supply Chain: Three to Eliminate Retail Stock-Out and Over- Key Imperatives for Retailers: August Stock; May 2009 2009 Author: Sahir Anand, Research Director, Retail, Hospitality & CPG, (firstname.lastname@example.org) Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. 010908a © 2009 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897
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